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United States: is this the end of a cycle?

Since the beginning of the recovery, on average real GDP has increased at an annualised rate of 2%. This cycle is already one of the longest in US history. The US economy is now nearing full employment without generating the inflationary pressure expected at this stage of the cycle. Corporate earnings recovered dramatically in the first years after the crisis but business investment has proved sluggish by historical standards, probably due to the slowdown in productivity and the uncertain outlook.

The ongoing cycle is fragile. On the real economy side, the ongoing expansion continues at the price of increasing imbalances, especially in terms of debt. However, imbalances are the most striking on the financial side. In fact, the equity markets seem clearly overvalued in view of the traditional metrics (Shiller’s P/E etc.) and interest rates are well below their equilibrium level. The recession risk is quite low from an economic point of view. However a sharp correction in asset prices would likely put the economy in recession.